French finance minister quits

Unemployment rate rises to 10% in January

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AudeLagorce

EmilyChurch

LONDON (MarketWatch) -- Finance Minister Herve Gaymard resigned on Friday after less than three months on the job amid a scandal over his taxpayer-funded Parisian apartment and as the French unemployment rate rose to 10 percent.

Gaymard is the third finance minister in less than a year to resign at a time when France, like Germany, is pushing labor market and other structural reforms to spur lagging economic growth.

Prime Minister Jean-Pierre Raffarin swept away the controversial 35-hour working week earlier this month and has pledged a decline in unemployment this year to 9 percent. On Friday, the French statistics office, Insee, said unemployment rose to a five-year high of 10 percent in January.

Economists say Raffarin and President Jacques Chirac will need to appoint an experienced political hand to usher though the reforms. The best candidate for now is not necessarily an entrepreneur, such as former Finance Minister Francis Mer, who left in April 2004, they said.

It will be key for France that the new finance minister encourages the notoriously resistant trade unions and state-sector lobbyists to accept reforms, they said.

"Four finance ministers in one year is a bit too much. It's hurting the credibility of France on the international stage," said Marc Touati, chief strategist at Natexis Banques Populaires. He sees front-runners to succeed Gaymard as including Thierry Breton, chief executive of France Telecom
FTE, -1.08%
and politicians Francois Fillon, the education minister, and Philippe Douste-Blazy, the health minister.

France "needs to go for more someone who can really push through the tax and pension reforms and labor market reforms and bring the trade unions and the lobby groups on board," added Jonathan Said, economist at the Centre for Economics and Business Research in London.

Dominique de Villepin, the interior minister, is another likely candidate, said Christophe Donay, chief strategist from Kepler Equities.

He expects Chirac will want to appoint someone from his close political circle. De Villepin was among the most critical of American foreign policy when he was foreign minister during the Iraq war.

Gaymard's resignation "will have a minimal impact on the markets because the euro is a strong shock absorber of national events," said Valerie Plagnol, chief strategist at CIC Securities in Paris.

His resignation had been anticipated as concerns grew over his 14,000 euros-a-month ($18,500) a month apartment. The scandal erupted last week when French satirical publication Le Canard Enchaine said he was living in a 600 square-meter flat paid for by taxpayers.

Gaymard's more illustrious predecessor, Nicolas Sarkozy, quit late last year to run the center-right UMP party and is expected to challenge Chirac in the next election.

Hard pressed for faster pace of growth in 2005

France's economy improved in the latter half of 2004, but most economists expect it will be hard for France to see the pace improve in 2005, particularly as high joblessness threatens domestic demand.

The jobless rate in the two countries -- the largest economies in the eurozone -- are well above the average of the eurozone, which economists expect to hold largely steady at 8.5 percent this year.

"France achieved high growth last quarter, although mainly as a result of one-off government measures such as cuts in inheritance taxes," CEBR's Said said.

French unemployment lifted to a five-year high of 10 percent in January, up from 9.9 percent in December, the Insee statistics agency said. Economists had projected the jobless rate to hold steady at 9.9 percent.

The uptick in January unemployment "suggests that France's cycle may be returning in line with Germany and Italy. High unemployment is likely to dampen the recent improvement in domestic demand," he said.

The most recent business confidence measures for Germany, France and Italy have seen downturns, upsetting an optimistic trend starting late last year. On Friday, Insee said its Manufacturers Confidence index fell to 104 in February from 105 in January, down from an October high of 107.

While the dollar's weakness plays a large part in the fragile business confidence in Europe, the recent slate of downbeat indicators is likely to lift the pressure on French and German politicians to speed up labor market reforms.

German Prime Minister Gerhard Schroeder's government is also expecting employment to improve in the second half of the year.

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